q3 2007 citigroup inc. earnings conference call on oct. 15...

F I N A L T R A N S C R I P T

C - Q3 2007 Citigroup Inc. Earnings Conference Call

Event Date/Time: Oct. 15. 2007 / 8:30AM ET

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C O R P O R A T E P A R T I C I P A N T S

Art TildesleyCitigroup, Inc. - Director IR

Charles PrinceCitigroup, Inc. - Chairman, CEO

Gary CrittendenCitigroup, Inc. - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Jason GoldbergLehman Brothers - Analyst

Betsy GraseckMorgan Stanley - Analyst

Guy MoszkowskiMerrill Lynch - Analyst

Glenn SchorrUBS - Analyst

John McDonaldBanc of America Securities - Analyst

Ron MandleGIC - Analyst

Mike MayoDeutsche Bank - Analyst

Meredith WhitneyCIBC World Markets - Analyst

Jeff HarteSandler O'Neill - Analyst

Vivek JunejaJPMorgan - Analyst

Diane MerdianKBW - Analyst

P R E S E N T A T I O N

Operator

Good morning, ladies and gentlemen, and welcome to Citi's third-quarter 2007 earnings review featuring Citi Chairman andChief Executive Officer, Charles Prince, and Chief Financial Officer, Gary Crittenden. Today's call will be hosted by Art Tildesley,Director of Investor Relations.

We ask that you hold all questions until the completion of the formal remarks, at which time you will be given instructions forthe question-and-answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, pleasedisconnect at this time. Mr. Tildesley, you may begin.

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Oct. 15. 2007 / 8:30AM, C - Q3 2007 Citigroup Inc. Earnings Conference Call


Art Tildesley - Citigroup, Inc. - Director IR

Thank you very much, operator, and thank you all for joining us today for our third-quarter 2007 earnings presentation. We aregoing to walk you through a presentation. That presentation is available on our website now, so if you haven't downloadedthat, you want to do that now.

The format we will follow will be Chuck will start the call, Gary will take you through our presentation, and then we would behappy to answer any questions you may have.

Before we get started, I would like to remind you that today's presentation may contain forward-looking statements. Citigroup'sfinancial results may differ materially from these statements, so please refer to our SEC filings for a description of the factorsthat could cause our actual results to differ from expectations. With that said, let me turn it over to Chuck.

Charles Prince - Citigroup, Inc. - Chairman, CEO

Art, thanks very much, and good morning to everybody. Thanks for joining our call this morning. As Art indicated, I'm going tostart with a few minutes of discussion on our performance this quarter, both the core performance in certain of our businessesthat we preannounced a couple weeks ago, as well as the very good performance in some of our businesses. Then I'm goingto turn it over to Gary to take you through the detailed presentation. Then as always, we will be happy to answer questions.

Before I get started, I would like to comment briefly on our Thursday organizational announcement. I hope all of you saw thatwe are forming a new business segment. -- we're going to call it the Institutional Clients Group -- by combining our Markets &Banking business and our Alternative Investments business under one leadership team. We have asked Vikram Pandit to leadthis new group. I believe everybody knows Vikram pretty well and his background, his very significant accomplishments. In thisnewly formed group, we will continue to have Michael Klein doing his good job as Chairman and co-CEO of Markets & Banking.We have promoted Jamie Forese, who has done a very good job running equities the last few years and has a long history infixed income, to be co-CEO of Markets & Banking with Michael. John Havens will be the President and Chief Executive Officerof Citi Alternative Investments.

I think these changes are going to be very positive for us. There are obvious overlaps between these two businesses, and thisnew structure will enhance our ability to serve institutional clients both across the entire capital market spectrum and aroundthe world. So we are looking forward to real progress in moving capital between these two businesses, and in growing andretaining our clients, and attracting good talent on the Street.

With that said, let me turn to the quarter's results. As we preannounced two weeks ago, the write-downs and losses in our fixedincome business and the higher credit costs in our Global Consumer business drove a significant earnings decline. Some of thewrite-downs and losses in fixed income were because we have been one of the largest providers of leveraged financing andmortgage-related structured products to clients around the world. When those markets severely dislocated, we obviouslysuffered losses.

However, some of our losses and structured credit and credit trading were greater than would have been expected from thatmarket dislocation and simply reflect poor performance. In the context of our strong track record in these businesses, goingback over many, many, many years, I would say this quarter's performance was well below our expectations and, frankly,surprising.

We are focused on improving these areas. We are working very hard on making sure that our return to strong performance issomething we can be confident in, in these traditional areas. And Gary will discuss some of the actions we are taking.

I do you want to say a word about risk management in this context. We have a very strong risk management infrastructure atCiti, and the losses this quarter in fixed income were within the range of potential outcomes. But obviously at the very far end






of that range, as they relate to our risk limits. We look at these risk practices all the time, and we are going to incorporate thissummer's experience into that as we go forward.

Let me just switch to consumer credit for a second. As we said on our second-quarter earnings call, the consumer creditenvironment is a challenging one, especially here in the US; and we expect meaningful increases in credit costs. This quarterthat played out. Credit costs in Consumer increased over $2.8 billion as we built both loan loss reserves and had a meaningfulincrease in net credit losses. Gary will take you through the drivers of this increase in great detail later in the presentation.

Now at the same time we had this poor performance in these various businesses, I do want to touch on a couple of areas wherewe continue to have strong performance, and strong performance that continues the trend we saw beginning in the fourthquarter of '06 and continuing in the first and especially in the second quarter of '07.

In securities and banking, we had many businesses perform well. Equity markets, equity underwriting up significantly. Advisoryrevenues up significantly. And even in the fixed income markets we discussed earlier, several product areas performed well; forexample, municipals, interest rate trading, and currency trading.

Our global transaction services business generated another quarter of strong growth and record results. In our internationalMarkets & Banking businesses in Asia, Latin America, and Mexico, we again generated record revenues and double-digit netincome growth. Our Global Wealth Management business also had a very strong quarter, with record revenues; and that is evenbefore adding the benefit from the Nikko Cordial acquisition.

Also in the international space, our International Consumer business continues to do very, very, very well, with both revenuesand business volumes growing at a strong double-digit pace. This reflects our strategy, with both organic growth and our recentacquisitions pulling forward very strongly.

In our US Consumer business, though the market dislocation that affected our fixed income business affected certain aspectsof the revenue generation of this business, which Gary will get into, the underlying business momentum that we have seenover the last few quarters continues to be very good. Deposits were up 16%. Loans up 8%. So I have said right along I'm cautiouslyoptimistic about our US Consumer business, and I would say the third quarter reinforces that I still feel good about that businessmomentum.

In addition to the operating results, we also announced or closed several important transactions during the quarter. We recentlyannounced our intention to make Nikko Cordial a fully-owned subsidiary in Japan via a stock exchange. The Nikko transactionis a very good one, something I am proud of, and something where we can show how we combine with strong, local institutionsto grow our international franchise.

In August, we closed the acquisition of The Bisys Group, which increases our footprint in the high-growth prime brokerage andsecurities processing area. We recently completed the acquisition of ATD, making us a top-tier electronic marketmaker andliquidity provider to institutional and retail clients.

So with that overview, let me just wrap up. This quarter's results were well below our expectations; and as Gary will describe,we are working very hard on the areas that need improvement. At the same time, the underlying momentum across many ofour businesses continues very strong. Execution on our strategic priorities continues, and we are very well positioned to growthese businesses and especially to grow our international franchises.

So with that as an overview, Gary, let me turn it over to you.






Gary Crittenden - Citigroup, Inc. - CFO

Thank you, Chuck, and good morning to everyone. Thank you for joining us this morning. Let me turn to the slides that areavailable to you on our website.

Slide 1 shows you our consolidated results for the quarter versus the third quarter of 2006. To summarize our third-quarterresults, net revenues grew 6% on strong underlying volume growth, partially offset by losses in fixed income and write-downsin leveraged lending. Expenses were up 22%. The cost of credit was up 139%, driven primarily by a substantial charge to increaseloan loss reserves and higher net credit losses in our Global Consumer businesses. Pretax income was down 59%. Net incomeand EPS were down 57%; and our return on equity was 7.4%.

Turning to slide 2, it shows five items which significantly impact the results for the quarter. First, we took a $1.352 billionwrite-down in our highly leveraged finance portfolio. Second, we took write-downs in the value of our mortgage-backedsecurities and leveraged loans which were warehoused for future CDO or CLO securitizations, as well as on CDO positions of$1.561 billion net of any hedges. This number is higher by approximately $250 million from the time of our October 1announcement, due to a refinement of our calculations as we went through the quarter-end closing process.

Third, in credit trading we suffered a $636 million loss as many of the historical relationships which form the basis for tradingdecisions in this business were disrupted.

Fourth, we had a $729 million pretax benefit in international card revenues from a partial sale of the shares that we own inRedecard.

Finally, we had a $2.847 billion higher credit cost in our Global Consumer business. This number is higher by approximately$250 million from the figure which we disclosed in our October 1 announcement. The increase is driven by higher charges toloan loss reserves, reflecting accelerating delinquencies in September in our US mortgage portfolio, and a finalization of ourestimates during the quarter-end closing process.

Turning now to slide 3, this shows a five-quarter trend in some of the key drivers in our business. Strong momentum continuedacross these drivers, especially in our international franchises, which drove revenues up by 30%, including the impact ofacquisitions and the Redecard gain. Drivers of net interest revenue showed strong growth. Consumer loans were up 8% in theUS and 29% internationally.

Internationally, organic consumer loan growth was 16%. Corporate loans were up 22%. Consumer deposits were up 16% in theUS and 18% internationally. Internationally, organic deposit growth was 8%.

Drivers of noninterest revenues also grew nicely. Credit card purchase sales were up 6% in the US and 37% internationally.Internationally, organic card purchase sales growth was 22%.

Investment assets under management were up 28% in International Consumer. Client assets under management in CAI wereup 50%. In our Global Wealth Management business, assets under fee-based management grew 38% or 20% organically. Ininvestment banking, we ranked number one in global debt underwriting; number three in announced and completed M&A;and number two in global equity underwriting on a year-to-date basis.

Now slide 4 shows third-quarter year-over-year revenue growth in each of our major businesses on the top half. The graph atthe bottom of the page shows the year-to-date growth. In looking at the top half of the page, in US Consumer revenue growthwas flat, primarily driven by the absence of a prior-year gain from the sale of mortgage-backed securities; a writedown in thevaluation of the residual interest related to the securitization activities; combined with lower securitization gains on lower-yieldingassets in our U.S. Cards business.






Markets & Banking revenues reflected the writedowns and losses that I have mentioned already. Alternative Investmentsrevenues were lower, reflecting lower hedge fund activities; the absence of a prior-year gain from the sale of MetLife shares;and changes in the market value of the Legg Mason shares.

Offsetting these results was organic revenue growth in International Consumer and Global Wealth Management, driven byboth organic growth and acquisitions. US revenues were down 12% and international revenues were up 30%. Acquisitionsaccounted for 5% of the year-over-year revenue growth; and business as usual activities accounted for 1%.

Year-to-date revenue growth trends are strong despite the severe market dislocations in the third quarter. We are pleased tosee that the relative growth rates of our businesses -- Markets & Banking, International Consumer, and Global Wealth Management-- all grew revenues at double-digit rates. In total, our international revenues grew 27% and our US revenues grew 2% as wecontinue to reweight Citi to the higher-growth opportunities. Acquisitions accounted for 3% of the year-to-date revenue growth.Business as usual activities accounted for 11%.

The bar graph on slide 5 shows the nine-quarter sequential trend of the change in net interest revenue. The table at the bottomshows you the net interest margin for the entire Company for those same nine quarters. As I mentioned earlier, we have hadstrong volume growth in all of our businesses, which has resulted in a fairly steady improvement in the net interest revenueover the last four quarters.

As the table at the bottom of the page shows, net interest margin declined by 3 basis points sequentially. If you exclude thegray zone impact from both periods, net interest margin decreased by 1 basis point sequentially.

Slide 6 shows the trend of our expense growth. We anticipated that this quarter's expense growth comparison would bechallenging. If you look at the chart, expenses in the third quarter of 2006 were the lowest in the last seven quarters, primarilyreflecting reductions in advertising and marketing spend in US Consumer, and lower expenses in Markets & Banking.

The best way to truck our progress on expense management would be to track headcount growth and expense growth relativeto revenues. On both structural expense saves and total headcount reductions, we are ahead of our commitments. Our reportedexpense growth is 22%, and 14% without acquisitions; Nikko was the main driver.

Our business as usual expense growth of 14% is driven by higher business volumes throughout the franchise and the openingof more than 600 de novo branches in the last 12 months. Sequentially, expenses were down, primarily on lower compensationcost in securities and banking.

Slide 7 shows the trend in headcount growth. Although the graph indicates significant year-on-year growth, this was drivenpredominantly by acquisitions, which contributed 11 percentage points of the 16% year-over-year growth. Excluding acquisitions,from the first quarter of 2006 to the first quarter of 2007 headcount grew by 9%. From the second quarter of 2006 to the secondquarter of 2007 headcount grew by 5%. This quarter we had 5% headcount growth, which includes 2 percentage points causedby de novo branch openings.

The sequential headcount growth rate is 3%, with approximately half from acquisitions and half from business as usual activities.We continue to be heavily engaged in ongoing re-engineering efforts and are focused on expense management driving resultsfor the next year.

Turning now to slide 8, we discuss credit. It shows the year-over-year growth components in our total cost of credit and the keydrivers within each component. The total cost of credit increased by $3 billion, with $780 million or approximately one-quarterof the increase driven by higher net credit losses, and $2.2 billion or three-quarters driven by higher charges to increase loanloss reserves.






Higher net credit losses of $780 million were driven primarily by our Global Consumer business. In Consumer, NCLs increasedby $736 million driven primarily by higher balances from organic portfolio growth and acquisitions; continued deterioration inmortgages and in unsecured personal loans in the US, and in international cards and Japan consumer finance. This quarter'sincrease in loan loss reserves was driven primarily by the increase in Global Consumer reserves of $2.1 billion.

The Global Consumer increase can be split into two categories, the first contributing approximately 40% of the increase andthe second contributing approximately 60% of the total.

The first category, which accounts for approximately 40% of the build, includes for example a credit card customer who iscurrently in paying status with us but may increase his balance on a card, or for the first time start to use the card to take cashadvances. These behavioral patterns can be correlated with future delinquency and future losses. Our reserve build this quarterreflects such observed behavioral patterns in our portfolio as an enhancement to our loss estimation process.

The reserves we built in U.S. Cards last quarter and the builds in our remaining consumer businesses this quarter completesthis particular review of our Global Consumer business.

The second category accounts for approximately 60% of the build. Over half of this approximately 60% build is driven by leadingindicators which point to a continued deterioration in credit in certain portfolios, such as in US Consumer mortgages and certainmacroeconomic indicators. Less than half is driven by growth and seasoning in the portfolio and acquisitions.

Looking ahead, our reserve balance will always reflect the types of considerations I have just described.

Markets & Banking credit losses increased $98 million, primarily reflecting higher net credit losses and a $123 million charge toincrease loan loss reserves for specific counterparties. Credit costs reflected a slight weakening in portfolio credit quality.

The top half of slide 9 shows consumer credit net losses and loan loss reserves as a percentage of loans. The bottom two graphsshow 90-day delinquency rates for our first and second mortgage portfolios in consumer lending.

The top graph demonstrates that loan loss reserves and NCLs as a percentage of the consumer loan portfolio have held steady.Excluding the impact of gray zone, the ratio of NCLs to average loans has been fairly stable excluding last quarter. As a reminder,last quarter's 13 basis point sequential decline in the NCL ratio was driven by a number of acquisitions that closed during thatquarter. When impaired loans are acquired, they're booked on our balance sheet at their estimated net realizable value, whichresults in lower NCLs in the early months following the close of a transaction.

Loan loss reserves as a percentage of loans are higher sequentially, but in line with levels of two years ago and below the peakin the first quarter of 2004. Since that peak, the ratio has consistently declined until the first quarter of this year, when we startedto see it tick up. The declines were a reflection of a particularly favorable credit environment over the last couple of years. Theincrease now is a reflection of the current environment and the factors I described above, all of which warranted the additionto our reserve levels.

The two graphs at the bottom show the 90-plus-day delinquencies in our first and second mortgage portfolio in the consumerlending group, which have increased substantially, particularly in the month of September. The first mortgage delinquencytrend shows that the current delinquency levels are still running below their 2003 peak. In contrast, delinquency rates in oursecond mortgage portfolio are at historically high levels.

In part, our reserve action for our mortgage portfolio reflects the significant deterioration. Since the beginning of this year, wehad added over 1,700 collectors and recovery staff in our US Consumer businesses, of which over 560 were for mortgages inUS Consumer Lending. We continue to take deliberate actions to lower the volume of second mortgage originations throughchannels that have historically demonstrated a higher incidence of delinquencies, such as third-party correspondents. The shiftin origination channels, along with tightened underwriting criteria, have resulted in an improvement in the quality of originations






whereby loans originated in this quarter had higher FICO scores and lower loan-to-values on average than those originated ayear ago.

In addition to restricting the channels of originations, we have eliminated a number of product offerings. For example, we nolonger offer mortgage loans for investment properties or three- to four-family homes.

A word on resets. In our Consumer Lending first mortgage portfolio, approximately $1.7 billion or 2% of our adjustable-ratemortgages are scheduled to reset in the fourth quarter. Approximately $10 billion are scheduled to reset through the end of2008, compared to $1 trillion of resets in the US consumer mortgage market. Approximately 90% of our resets have beenprojected to be in the higher FICO, lower loan-to-value categories.

Slide 10 shows a historical trend of a number of key capital ratios and return on common equity for the quarter. As the graphshows, all of our capital ratios have declined since the beginning of the year, driven primarily by acquisitions which we havecompleted and organic acquisition growth. As we have said before, we target to keep our Tier 1 capital ratio above 7.5% andthe TCE -- total common equity -- to risk-weighted managed asset ratio above the 6.5% level. Both the Tier 1 capital ratio andthe TCE to risk-weighted managed assets ratio reflect the impact of acquisitions and additional assets, such as certain leveragedloans and commercial paper which came onto our balance sheet during the quarter.

Although at this time there is a lot of variability around the factors that impact our capital ratios, we expect that we will returnto our targeted capital ratio sometime early in 2008. We expect to restore our capital ratios in a number of different ways.

First, we are using stock as opposed to cash as consideration for the purchase of the remaining 32% of Nikko in a share-for-shareexchange. Second, we are focused on pursuing a disciplined approach to growing our balance sheet and deploying capital tothe highest growth and return opportunities. You may have seen our announcement a few weeks ago to centralize our treasuryoperations. Finally, organic earnings growth and earnings from our acquisitions will continue to generate capital for the Company.We anticipate, however, no further buybacks until we have reached our targeted capital ratios.

Now I will briefly take you through the results of each of our major business lines. Slide 11 shows results in our US Consumerbusiness. Revenues were flat versus last year's third quarter. Good volume growth from our strategic actions was offset by threefactors.

First, the absence of a $133 million gain from the sale of mortgage-backed securities in the third quarter of 2006. Second, wehad a downward adjustment in the valuation of the residual interest that we hold on our credit card securitizations which getsmarked to market. This was driven primarily by an expectation of continued deterioration in consumer credit, combined withan increase in short-term funding costs as commercial paper spreads widened significantly during the quarter, partially offsetby the decrease in Fed funds in mid-September.

Third, the receivables securitized this quarter were of higher credit quality and had lower yields than those securitized in lastyear's third quarter, resulting in lower securitization revenues in the current quarter.

Expenses in US Consumer grew by 8%, driven by a significant reduction in marketing and advertising expenses in our cardsbusiness in last year's third quarter, as well as the impact of integrating the ABN AMRO acquisition this quarter into our ConsumerLending group. Credit costs increased by $1.7 billion, driven by the factors that I discussed earlier.

A significant reduction in net income is reflective of the challenging market conditions and year-over-year comparisons, combinedwith the additions to our loan loss reserve.

Slide 12 shows the results of our International Consumer business which have been affected significantly by the results in Japanconsumer finance. So let me start with the impact of the gray zone this quarter. We had a loss in Japan consumer finance thisquarter of $288 million driven by three primary factors.






First, revenues were lower by 52%, driven by lower receivable balances and increased charges to reserves as estimates for lossesfor refund claims increased.

Second, expenses increased 67% driven by write-downs of $152 million pretax on customer intangibles and fixed assets. Thischarge is being taken because we have concluded that the carrying value of these specific assets is not recoverable. Excludingthese write-downs, expenses in Japan consumer finance are down approximately one-third from last year's levels as we continueto reposition the business.

Third, credit cost increased 25% on higher NCLs and a reserve build of $161 million to reflect our expectation of higher lossesinherent in the portfolio. In this business, the situation remains difficult; and given our recent experience with the level of grayzone related refund claims, our best estimate now is that the business will have net losses in 2007. We continue to analyze theprofitability prospects for this business thereafter.

Now let's put Japan consumer finance aside and look at the results. As you can see from the middle section of the slide, excludingJapan consumer finance, International Consumer revenues were up 47%. Pretax income is up 30%. Net income is up 17% asthe absence of prior-year tax benefits caused a 13 percentage point negative impact on net income growth.

Revenues for this quarter included a $729 million benefit from the sale of Redecard sales. Excluding the Redecard gain andJapan consumer finance, International Consumer revenues were up 31%.

A quick word on Redecard. Redecard is the only merchant acquiring company for MasterCard in Brazil. Prior to the July 2007Redecard Initial Public Offering, Citigroup was a 31.9% shareholder. We sold a portion of our Redecard shares for a pretax gainof $729 million and an after-tax gain of $469 million which is recorded in our International Card results. Citi continues to holda 23.95% investment interest in Redecard.

International Cards' averaged net receivables grew 52%, reflecting strong organic growth and the impact of acquisitions. Welaunched five new partnerships in the quarter, including AirAsia in Malaysia and Shell in the UK. We now have 189 partnershipsin 44 countries and continue to expand the partnership program.

Retail banking revenues were up 26% driven by strong loan, deposit, and investment product sales growth. However, continuedinvestment spending, higher credit costs reflecting the impact of portfolio sales, and a reserve release in last year's third quarter,and reserve builds this quarter, and lower tax benefits this quarter drove net income down 21%. Outside of Japan, consumerfinance receivables were up 20% and revenues were up 22%.

International Consumer expense growth excluding Japan consumer finance reflected the acquisitions that closed during theyear and continued investment in our distribution network. We opened or acquired 392 retail bank branches and 212 consumerfinance branches in the last 12 months.

In Japan consumer finance, credit conditions continue to deteriorate. Outside Japan, credit costs were up $1 billion reflectingincreased estimates of losses inherent in the portfolio, results from acquisitions, organic portfolio growth, and seasoning andthe absence of prior year's net releases of $93 million in International Retail Banking.

For the total business, the net impact of gray zone and higher credit costs were the primary drivers of a 15% decline in netincome.

Slide number 13 shows the results in our Markets & Banking business. The impact of the severe market dislocations resulted ina revenue decline of 24% and a net income decline of 74%. There were three major drivers of the revenue decline.

First, $1.4 billion came from highly-leveraged loan write-downs, of which $901 million was taken against our debt underwritingrevenues and $451 million against lending revenues.






Second, $1.6 billion from write-downs in mortgage-backed securities which were warehoused for future CDO or CLO securitizationsas well as on CDO positions. Our subprime exposure related to these positions was $24 billion at the beginning of the year, $13billion at the end of the second quarter, and declined slightly during the third quarter.

Third, $636 million from losses in credit trading. A major factor driving the magnitude of our losses and write-downs is that weare a major player in the markets that were hardest hit by the dislocation. We have historically been a top underwriter ofleveraged finance and a leader in the structured credit and credit trading businesses.

That said, as Chuck mentioned, there is no question that we underperformed certain competitors even considering turbulentmarket conditions. We must examine the situation, learn lessons from it, and make changes.

To give you a sense of some of the things we are working on, first, we have reorganized credit trading and have changed theleadership of this business. Second, in our structured credit business, CLO and CDO structuring volumes have dropped significant;and we are diversifying our business more towards trading, where we have traditionally had a strong market position.

Third, in leveraged finance we continue to actively renegotiate and restructure the transactions to ensure they are executed atoptimal terms. Fourth, we are examining our risk management organization to enhance particular areas such as convergencerisk management and the management of aggregate exposures by asset class.

Fifth, we have changed pricing and terms on many products across the consumer and corporate businesses to reflect therenewed interest in bank funding as a source of capital. Sixth, in spite of the market dislocation in the third quarter whichaffected our efforts, we are working on pursuing a disciplined approach to growing our balance sheet and deploying capitalto the highest growth and return opportunities.

Finally, as we invest in businesses where we have competitive gaps, such as commodities and prime brokerage, we continueto diversify away from our dependence on the fixed income business in Markets & Banking.

While we are diligently working on many issues across the firm, the underlying business momentum remains very strong acrossthe franchise. The issues we are dealing with are specific to the market dislocations in the quarter; and we have taken lessonsfrom it to enhance the way we manage the business.

Offsetting the declines I referenced earlier several businesses showed strong results in the quarter. In fixed income markets,currency and interest rate trading results were strong and revenues were up double digits. Equity market revenues were up19% from a year ago, but down 35% from record second-quarter results. Cash, derivatives, and equity finance showed goodgrowth versus last year, partially offset by weaker results in convertibles due to lower customer flows.

In our Investment Banking businesses, we remain number one in combined global equity and debt underwriting for the 24thconsecutive quarter. We had record revenue results in advisory, and advised on eight out of the top 10 deals year-to-date.Revenues in fixed income underwriting were affected by the leveraged loan write-downs; and equity underwriting revenuesalmost doubled versus last year but were lower than the record second quarter.

In global transaction services, revenues increased 38% to a record $2.1 billion, driven by higher customer volumes, stable netinterest margins, and the acquisition of The Bisys Group which closed in August of 2007. Key revenue drivers continued to growat strong double-digit rates.

Expenses increased 11% versus last year. Lower compensation costs were offset by significantly higher other operating andadministrative expenses. These higher operating and administrative expenses are a reflection of acquisitions, legal costs, andother business development costs.






Record revenues in Asia, Latin America, and Mexico reflected the strength of the franchise in those regions and the fact thatthe market dislocations in the US, while affecting some markets, did not have widespread impact across the globe.

The overall investment banking pipeline decreased during the quarter, driven by a drop in leveraged finance activity. However,the M&A pipeline remained at record levels, and the equity underwriting pipeline remains strong.

Slide 14 shows results in our Global Wealth Management business. Revenues were up 41% driven by strong customer activity,the impact of Nikko, and the inclusion of the Quilter acquisition. Excluding Nikko, revenues were up 19% and were a record.Assets under fee-based management were up 38%, 20% excluding Nikko, on strong market action. Net interest margin increasedover the last year in Smith Barney, benefiting from the bank deposit tiering program.

Expenses were up 38% driven by an increase in compensation costs on higher revenues and the impact of acquisitions. ExcludingNikko, expenses were up 18%.

One point to note. Last quarter we completed the integration of Citigroup Investment Services, which was previously managedand reported in the retail distribution segment into Smith Barney. This resulted in a transfer of 686 FAs and $47 billion in clientassets this quarter into Smith Barney. Strong revenue results, good expense control, and the impact of acquisitions drove anincrease in net income of 23%.

Slide 15 shows results in Alternative Investments and Corporate Other. In Alternative Investments revenue and net incomedeclined, primarily driven by lower results in our hedge fund activities, the absence of gains from the sale of MetLife shares inthe third quarter of 2006, and lower market value in Legg Mason shares. Client revenues were up 75%, reflecting the integrationof Old Lane and organic growth.

Corporate/Other income declined, primarily reflecting higher Nikko related charges and the absence of a prior-year benefitrelated to retirement benefits plans, which were partially offset by improved treasury results.

Now to wrap up on slide 16, let me give you a few thoughts on the fourth-quarter earnings environment. Starting with whatwe saw in September, there were some promising sign such as better quality leveraged finance and asset-backed transactionsbeing successfully executed. However, many parts of the fixed income market and many types of investment vehicles such asCDOs have shrunk dramatically; and we're not optimistic that they will regain a foothold in the market.

Our underlying business momentum is strong, and we're well positioned in many of the fastest-growing countries. We expectour broad presence and the depth of our client relationships to generate results. We expect continue to rapidly expand ourinternational franchise.

As the structural expense initiatives we announced in early 2007 are on track, they're delivering the cost savings that we projected.As we embed a discipline of continual re-engineering at the Company, we expect to become more and more efficient, drivingstronger bottom-line results.

We continue to watch credit very closely. Our expectation, based on the acceleration in our mortgage delinquencies in Septemberthat I discussed, is that consumer credit in the US will continue to deteriorate in the fourth quarter. Our overall cost of creditincluding NCLs and any incremental reserve builds will reflect the economic environment, the credit performance in our portfolio,and the portfolio growth.

The situation in Japan consumer finance remains difficult. Given our experience with the level of gray zone related refundsclaims, our best estimates continues to be that the business will have net losses in 2007. We continue to evaluate the profitabilityprospects of the business thereafter.






Finally, as you may know, we announced that we would centralize our treasury functions, which will facilitate the allocation ofcapital to our highest growth and return opportunities. Let me now open it up for questions and answers.

Art Tildesley - Citigroup, Inc. - Director IR

Operator, we are ready to begin the questions and answers.

Q U E S T I O N S A N D A N S W E R S

Operator

(OPERATOR INSTRUCTIONS) Jason Goldberg with Lord Abbett.

Jason Goldberg - Lehman Brothers - Analyst

It's Lehman Brothers. I guess with respect to earnings, I guess, income came in a bit higher than expected despite somewritedowns, a bit more than expected. I guess, relative to your expectations, kind of what came in better? Because it seems likea pretty big difference given the quarter was already over.


You know, I wouldn't think about it that way. As you might guess, when we were making our estimates at the end of the quarter,we had not closed our books, had not been through the closing process at the time. Obviously, we were trying to be judiciousin what we expected the total potential decline in income to be.

It was simply, I think, a judicious call at the time to say that we were going to be down by 60%. So I wouldn't think about it anydifferently than that, Jason.


Okay. Then secondly, can you just talk about off balance sheet exposures, particularly related to SIVs in terms of what yourexposure remains? Then obviously, a lot of news coming out over the weekend on that.


Yes, we have different types of off balance sheet exposures. Those that we have some kind of contractual commitment to, wedisclose in our Q. You can see those numbers in our Q.

We also manage, as you mentioned, a SIV that we manage in the UK. We don't have any contractual obligation to providefunding for that SIV, nor do we consolidate it.


Okay, and I guess with respect to actions announced this morning, can you give us any color?







You know, I'm not aware that any actions have been officially announced, yet.


Okay. Then just lastly, can you just maybe talk about in terms of leveraged lending exposures? I guess you gave us kind of theCDO numbers. But the kind of the balances in terms of leveraged loans and where we stand on that?


Yes, as we concluded the third quarter, our net exposures were $57 billion.


Okay, thank you.

Operator

Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley - Analyst

Good morning. Thanks. A couple of questions. One was on the reserve methodology. I know you detailed how you changed it,the impact of the change. But maybe you could help us understand how you have worked with the regulators to get them toapprove this change.

I am wondering if you even needed regulator approval, because I was under the impression that it was difficult to changemethodologies.


We didn't need any type of regulatory approval here. There was actually no methodology change. What we did during thequarter was refine our estimate process. We started this actually back in the second quarter and we have been working acrossour entire consumer portfolio to try and identify behavioral changes, which at the end of the day will result in a loss that isembedded in our portfolio today. I gave you an example of that.

Another example might be if you had a mortgage customer, for example, that is now paying their mortgage three or four dayslater in the month that they had historically. We went back and did the correlations on that kind of thing. We saw that thoseeventually resulted in losses that were actually embedded in the portfolio today but hadn't manifested themselves.

So we refined our estimate on that, and that accounted as I said for a hunk of the addition to the loan loss reserve that we didduring the course of this quarter. But the regulators aren't really involved in that. That doesn't require any kind of regulatoryapproval. That is just something that we do as the normal effort to improve the quality of estimating what our eventual lossmight be.







Okay, because you indicated that this was the close of the Global Consumer business review with regard to the reserving levels.Is that right?


This particular set of activities that has gone around, we have really gone around the world. We did $240 million roughly of thisin the first quarter in the U.S. Card business. We did the remainder in this quarter. So that effort to try and identify theserelationships that will eventually emerge as losses in the portfolio is now complete.


Okay, but if you were to find other indicators that would help you in the reserving methodology, you could tweak again?


We could, yes. We constantly are working to try and improve the quality of what we do from a reserve estimation process. Wecertainly could do that in the future as well.


Then, it was my read of the chart on, I think it was page 10, the net charge-off, net credit losses, and the reserve levels. It's onpage 9, actually.


Yes?


There is still a gap there, right, of about 20 basis points?


Between what?


The net charge-offs and the loan loss reserves in the Consumer -- Global Consumer book?


Yes, but that is just purely coincidence. Those numbers, as you can see historically, have been above and below each other. Wedon't make any particular effort to try and have those numbers align.







I guess I am just wondering, in an environment where the Consumer is deteriorating, should we expect that this gap shouldpersist? Or in the past had, because it is not showing here on the chart, in deteriorating credit environments, whether or notthe reserve ratio had been running above net charge-offs ever.


Well, I think what I said about my expectations for the fourth quarter is very much what we feel. We are in a deteriorating creditenvironment. That was particularly pronounced if you look at the bottom of that same page that you are talking about, therereally is a deterioration happening in mortgages right now.

We think we are running better than the industry based on the numbers that we can see. But we have kind of a 30-day lag ingetting the information from the industry. We think we are running better than the industry. But having said that, there clearlywas an uptick in the quarter; and our expectation is that that is going to continue as we go into the fourth quarter.


Then on capital allocation, you have indicated a couple of times that there are lots of opportunities for improving the efficiencyof the capital deployment. Could you just give us a sense as to what you see some of the low-hanging fruit is, and the degreeto which you could move the needle on ROA or ROE?


Well, during the course of this quarter we organized -- we have been talking about it for a time -- we organized a central treasurygroup and appointed a new treasurer. One of the objectives of that team is obviously to help us to allocate capital in the mostefficient way across the Company as we possibly can.

We have been through a process of putting together a matrix more or less that shows the product categories in which wecompete that have low return on regulatory capital and low return on risk capital. Those are the first assets that we are focusedon.

So if you look on the balance sheet in the supplement, for example, I'm just going to turn there very quickly. This is now onpage 7 of the supplement. And you focus on the investment line item of the supplement, you will see that that line item is downby 12%, reflecting for example the sale of a significant portion of the mortgage-backed securities that we had in our ConsumerLending business in the United States.

It is examples like that, Betsy, that we are very focused on to try and take out of the portfolio. As soon as it makes economicsense to do so. That is the kind of example that I think serves us well.

Now we have a long-term target for return on equity of somewhere between 18% and 20%. We obvious well underperformthat target today, so we have got a lot of work to do to keep the commitments that we have made to you all. It is not helped,obviously, by the fact that we have had some assets come on the balance sheet this quarter that were not part of our originalplan.

But we are attacking those assets. We are going to be thoughtful about this. We have got someone I believe who is an excellentleader for the treasury function to lead that effort. But it's going to take us a while to reverse the impact of these assets that






have come onto the balance sheet; but we have every expectation of being able to make good progress on this over the nextcouple of years.


And the capital -- key capital ratio that you are focused on is TCE to risk-weighted managed assets, is that right?


Yes. I mean, Tier 1 and TCE care both important, but we are obviously very focused on both. Our hope, as I mentioned, is thatwe will return to a more normal level in the early part of 2008.


More normal level is 6.5% on a TCE?


Yes, 6.5%, yes, 6.5%.


Okay, thanks.

Operator

Guy Moszkowski with Merrill Lynch.

Guy Moszkowski - Merrill Lynch - Analyst

Can I just ask you, first, a factual question? Leveraged finance write-down gross of the fees, because you presented it net offees?


You know, we haven't disclosed it. Fees typically run 1.5% to 2%, so I'm going to just have to let you make an estimate, becausewe decided not to disclose.


Okay, thanks. We will work with that. On the structured product, MBS writedown, the subprime MBS writedown, etc. -- the stuffthat was going to go into the structured product -- do you have a gross number there?

Would the hedges that you referred to that would have reduced that include structured finance gains on the structured financeliabilities?







Yes, so the -- if you take the total gross number there, again we haven't disclosed that. There was significant hedging. So if youlook at the way the kind of final position came out, the $1.6 billion, that was net of our hedges. We didn't disclose the hedgenumber again.

But I guess the way I would think about it is we cut the exposure that we had, as I mentioned, from 24 or so billion at thebeginning of the year down to $13 billion. Coincident with doing that we also increased the amount of hedging that we did towhat I would say is a significant level. So there was a fairly significant gain on hedges that were reported in the quarter thatoffset that.

I believe -- I am looking here at John Gerspach -- I believe that during the quarter that also included the fair valuing the liabilitiesagainst that number; and the answer to that is yes.


Can we get some round number around the fair value of the liabilities mark?


I think the fair value of the liabilities mark in the quarter was $446 million -- $466 million. Now, of course, there were also similarcounterparty spread movements on the asset side of the balance sheet that would have roughly offset that amount.


Okay, that's fair. Thank you for that. Can we talk a little bit about, in broad strokes, the continued decline in net interest margin?How much of that was due to mix shift in your deposit base toward deposits that you're actually paying for and how much dueto some other things?


The underlying trend there really was heavily influenced by Nikko. So Nikko came on with a lower funding cost but lower yieldingassets. So, a couple of those basis points was influenced by Nikko.

If you kind of take that out of the picture and just say more aggregately what is happening, what is happening is that we actuallyhad higher yielding assets in the quarter.

We had somewhat lower cost of liabilities in aggregate, but the mix shift between assets was adverse. That is the mix becauseof the Nikko acquisition and the mix shift towards the trading assets that we have resulted in some deterioration in NIM in thequarter.

But the pronounced impact there was Nikko Japanese gray zone; if you took those two out of the picture, it was essentially flaton a sequential basis quarter-over-quarter.







Thanks, that's very helpful. Let me just ask one more question, if I might, about the increase in net credit losses and loan lossreserves on the international side, which to me at least seemed surprising, I think, even beyond Japan consumer finance.

Can you give us a little bit more color on what you are seeing in the areas beyond the Japan consumer finance problems inInternational Consumer that caused you to put up such a significant increase in reserves?


I mean, it is a fair question. Because if you look, for example, on page 18 of the supplement and focused on the 90-day past duein the Card business, what you see is that it actually had improved some during the course of the quarter. I think you see thatpretty much across International.

That said, we did the exact same exercise, now internationally, that we had done in the US. Which is we made a diligent effortto go through each one of the portfolios and make sure that, if we could identify behavioral patterns that would eventually endup in a loss of some sort, that we reflected that and embedded that in our reserve today.

So I think you should -- obviously, it is not driven by the underlying deterioration in delinquencies for the most part. I think thatis really what is there.

Now having said that, we do have some continued deterioration in Mexico as part of an ongoing effort that we are making togrow our business there. A successful effort to grow our business there. We have had some deterioration, but it doesn't reflectitself -- it is not large enough to reflect itself in the overall numbers for the Company.


Right. One bright spot actually seemed to be GTS, transaction services. The dynamic seemed to be pretty positive there. Maybeyou can give us a little bit more color on what was going on in that business.


You know, what is going on, frankly, is a continuation of the excellent things that they have done. So if you look at the underlyingmetrics for the GTS business, on just about every count the underlying metrics look good. The growth in deposits; the strengththat we have internationally in that business; as you can see, the expense leverage was good in the quarter. The addition ofBisys has gone at least to date very smoothly. So that appears to be a business that is obviously performing very well.


So there wasn't anything in it that you thought was sort of an offset to the problems we were seeing elsewhere, just in termsof like flight to quality and things like that?


You know, the one thing that did happen during the course of the quarter, as people did not invest in typical kinds of things,so companies that might have done asset-backed CP investing in the quarter tended to hold higher cash balances. And therewas some benefit of that that was reflected in the quarter.







Okay, great. That's very helpful. Appreciate your answers.

Operator

Glenn Schorr with UBS.

Glenn Schorr - UBS - Analyst

Could we just get a comment on, say, the asset-backed commercial paper market? Just in terms of if it was functioning at full100% strength, call it like six months ago, a year ago, where are we at now? How much has moved on balance sheet and howmuch -- are durations extending at all? Can you just give a little bit of flavor for what is going on in that market right now?


Yes, if you don't hold me to a specific percent, I will give you a flavor for how it (multiple speakers).


Yes, just the flavor is great.


So, if it was 100% a while ago, it obviously had declined very, very significantly into kind of the August time period and wasessentially not functioning. But it has longer terms associated with it; so it doesn't stop functioning and then suddenly there isno asset-backed commercial paper. It terms out over time.

So as that was being kind of wound down, you saw the asset-backed commercial paper -- as a percentage of our funding atleast -- declining. But not declining at a precipitous rate, because it comes off gradually.

Now beginning about a month ago, the asset-backed commercial paper market started to reopen. Now we are seeing, forhigh-quality issues, the reemergence of an asset-backed commercial paper market. But it is not even anything like the levelsthat we saw some time ago.

So some of that is being replaced, at least in our case, by term funding; and that is obviously being balanced as we go forward.But there has been a return over the course of the last month to funding. Of course, we have a lot of high-quality assets,particularly our credit card receivables, things like that, that function very well in that market and we anticipate will be fundedjust fine, as people have become more discriminating in terms of the assets they are willing to buy.


What happens to the assets that they are not willing to buy? I agree with you, there is plenty of stuff that got lumped into thefour-letter word. But there is plenty of assets that people won't want to buy. So some gets out, and some -- what happens tothe stuff that -- will it sit on balance sheet, most likely?







Well, I think if you are asking about in the world, I think that is generally true.


The world, yes.


If you look at our -- the composition of our assets, the composition of our assets are actually very strong. So I don't think we arein a position where that is a significant issue for us individually. But I think in generally that is probably going to be right.


Okay. Then I will push the envelope a little on this one. Is just the conceptually of maybe a single master liquidity enhancementconduit, just what is the concept of why it would exist? Just to provide confidence? Because it doesn't seem like there isincremental capital being put out. Or would there be capital put out?


Well, again, there has been no specific announcement about anything like this, so I don't know if I should make any commentabout it. But let me just say that it is not -- it wouldn't be surprising to people on the phone that it would be helpful to haveother liquidity alternatives for SIVs that are managed in the UK.

As I understand from what I read in the paper this morning, that is generally the concept here. Alternatives that would provideliquidity there I think could provide reassurance to the market and make the funding there of very high-quality assets a littlebit easier.


Got it. Okay, one last one, shifting gears in Transaction Services, just did -- is there any numbers you can throw out Bisys wouldhave added on either side of the equation? Like revenue and expense; or just to the bottom line. Because I think all the trendsstill look good. I just want to be able to piece that piece out.


You know, Glenn, we haven't disclosed it. It is not in the supplement anywhere; and so, no.


Okay, thanks, Gary.

Operator

John McDonald with Banc of America Securities.






John McDonald - Banc of America Securities - Analyst

Hi, Gary. Question on the nonperforming assets. There was a big jump in the commercial side on the back page, total corporatecash basis. Can you give some color on that?


Yes, that is primarily driven by one single name. There is actually two there in total; but one is the larger of the two. That is, let'ssee, IKB AG, right? IKB AG, standby commercial paper arrangement that we had. So they were the funder of a CP. They were afunder of a SIV in the UK. We had a standby arrangement to support that SIV. When they became unable to provide that fundingwe had a requirement to step in and provide that funding. You see that as an increase in the cash loans that are there on thebalance sheet.

Now, you also see that we took a corresponding increase in our credit reserves in the corporate side of the loan loss reserve.We did that specifically in response to this. But that is the largest of the two pieces that are in that increase that you identify.


Okay, so most of the increase from 600 to 1,200 is two things, and you gave us one of them?


And that is by far and away the largest of the two pieces.


Okay. Did you answer the question on the chargeoffs for International Card jumped a lot. Is that Mexico?


Mexico was probably the single largest increase in the quarter. We have had some increase in Brazil and some increase in Indiaas well, but nothing that was -- that would have driven the numbers other than those three items.


The International Card delinquency is pretty stable, then? What was your outlook there just in the International Card?


Yes, if you look at it, it is very stable, and we feel pretty good about each of the markets that we have internationally.

That said, we did go through a pretty thorough process to ensure that if we could identify losses that were embedded in theportfolio and refine our estimates based on the identification of those embedded losses, that we took them in this quarter. Butit's hard to find that in the delinquency numbers. It is really much more based on the refinement of the modeling that we havedone.







Okay. A question on the net interest margin. You look like you have more wholesale funding reliant than the other US banks.There is some thought that this would make you more a beneficiary of the Fed cuts. Should theoretically you should have somebenefit as short rates comes down and your net interest margin, everything else equal?


It depends entirely on the shape of the yield curve. So the Fed funds rate has come down, but the yield curve shape has reallynot helped us materially at this point.

So, the general point that you make is absolutely correct, John. That if the curve shifted in the right way, because of our wholesalefund exposure it should be beneficial for us. But it would require the curve to have some steepness associated with it and forthe low end to shift down.


Which part of the curve would be most relevant when you talk about that shape, Gary?


If it goes down at the short end, that is the most advantageous thing to happen for us.


Which it has. I guess you are just talking about -- I mean, it has gone down on the short end. Something is happening on thelong end that is not helping?


You have got to have both the short come down and the long end stay up.


Like the 10-year? I mean we are just talking --?


Right, like the 10-year.


Okay, okay, last question here. Just on expenses, you were supposed to get roughly $2.1 billion in expenses this year under theDruskin plan plus the previously announced IT. Did you say where you are on that? 2.1 expected for '07; how much have you'vegotten so far?







We are going to hit that number. We haven't disclosed the number that we have hit so far, but we are right on track. In fact, weare probably running just slightly ahead of the plan at the end of the third quarter; and we will hit the $2.1 billion that wecommitted.


Okay. Then with the restructuring and management changes, any expected severance or anything like that, or restructuringcharges from the new business line announced?


No, nothing that is coming out of the activities that we just announced last week. Now, one of the things I should point out isthat we have ongoing re-engineering activities; and from time to time from those ongoing re-engineering activities there willbe severance cost, restructuring charges that we will take. Those may or may not happen in quarters when we have gains thathappen at the same time.

But there is certainly nothing coming out of what we have just done that would generate a restructuring charge.


Okay, thank you.

Operator

Ron Mandle with GIC.

Ron Mandle - GIC - Analyst

Morning. I have a couple of questions. One, I was just wondering how much foreign exchange might have added to revenuegrowth in the quarter?


FX added 2% to revenue growth in the quarter.


Okay, thanks. Then second, on the loan loss reserve, you mentioned that you saw credit deterioration in September. I guess ina way I am wondering why you didn't build the reserve more than you did, given that you basically said you were going to buildit more in the fourth quarter.







Well, first of all we did. So if you look at what we announced the reserve to be for credit costs at the time we did the October 1announcement, it was a couple hundred million dollars lower than what we actually ended up doing. That came because, aswe finished the quarter, we obviously saw this uptick that took place during the last two weeks of September.

The credit losses that you recognize have to be credit losses that are embedded in the portfolio as it exists today. So you cando your best to forecast behavioral changes like we have; you can look at macroeconomic factors and talk about how thosemacroeconomic factors influence what you believe the embedded losses to be in the portfolio today. All of those things youcan do.

What you can't do is look forward and anticipate losses that are not yet in your portfolio. So. But you might have a view whichyou can embed in these macroeconomic judgments that you make that your current portfolio is going to recognize those losses.But you can't pull future losses obviously into this quarter.


So in other words, then, you built the reserve in anticipation of higher fourth-quarter losses, so you will not have to build thereserve in the fourth quarter.


Well, let me just tell you the way I would think about it. The way I would say it is that there are a series of macroeconomic factors.Let me just give you an example. If you look at the number of days homes are sitting on the market, if homes are sitting on themarket for a longer period of time, that probably means that we have embedded in our portfolio today losses that have not yetemerged but will eventually have to be recognized.

We have tried to take into account those types of macroeconomic factors in assessing the reserve. However, you know -- butyou can't anticipate beyond that kind of thing. You can't anticipate a loss that is not embedded in your portfolio today. If thereis significant deterioration in the credit environment that goes beyond where things are today, we simply can't embed thatbecause we have that expectation.


In terms of asset-backed commercial paper and other disruptions in the quarter, I was wondering how much your balance sheetmight have gone up in the quarter because those disruptions of that sort.


Well, we didn't split it out specifically during the quarter. You can get a little bit of a flavor for it, obviously, by kind of goingthrough the piece parts of what happened. But we haven't specifically identified the balance sheet increase associated withdislocations.


Would you give us some guidance in that regard?







You know, we hadn't -- I don't think so.


Okay. Then finally, I'm just wondering, you have made the management changes. I am wondering what criteria the Board usesto decide how high up the management changes should be, given a quarter like this.


Ron, this is Chuck. I think the Board's criteria for that is to see whether or not we have a good, sustainable, strategic plan, onethat can see us through a long-term set of performance; and especially with the kind of headwinds that come -- like this quarter'saberrational impact of the fixed income.

I think with that kind of criteria, the Board feels comfortable at the levels that we have made the changes.


Okay. So that kind of assumes that markets and business trends will normalize in the fourth quarter and beyond, and that youwill be back on the track that you thought you were on at the end of the second quarter?


You know, I think the best way to think about that, Ron, is to go through the comments that I made on slide 16. I kind of steppedthrough each one of the business lines or each one of the major business lines and talked about the factors that we think arekind of the current update of where our performance is in the fourth quarter.


Okay, thanks very much.

Operator

Mike Mayo with Deutsche Bank.

Mike Mayo - Deutsche Bank - Analyst

Good morning. I just wanted to follow up on Ron's question. Chuck said this was the year of no excuses. You guys say the resultsare disappointing. So what are the repercussions at the level of the office of the Chairman?

When I look at results -- and feel free to educate me -- but the business line mishaps are not just Investment Banking. There aresome other areas. There are some risk management issues.

Expense management, no matter how you look at it, year-over-year, year-to-date, linked-quarter, you add back the charges,reducing some for comp; you still have negative operating leverage.






Then management. It was a year ago when Tom Maheras, Michael Klein were moved to head the Investment Bank. Now thathas kind of changed a little bit. Also, Dave Bushnell, head of risk management, was promoted three weeks before thepreannouncement. I was not sure what was going on with that.

But the bottom line here is almost all the investors that I talk with feel like there needs to be more significant changes in termsof management. So that is the data I am looking at. What are you looking at? Or what is the Board looking at that they feel morecomfortable?


Well, Mike, this is Chuck. I think I would repeat a large part of what I said to Ron. It sounds to me like a very similar question.

If you look at our results this quarter, no one can be happy with the results in our fixed income business or with the results thatrelate to that. But I think if you are able to look at the other parts of our business, if you look at the strategic plan that we areexecuting on, I think any fair-minded person would say that strategic plan is working. And the benefits that we saw in the fourthquarter and then more in the first quarter and then more in the second quarter are showing through in the third quarter in thebusinesses that haven't been impacted severely by the fixed income dislocations.

So if you look at even parts of securities and banking, and we called those out; if you look at our international business; if youlook at our GTS business; if you look at our wealth management business; if you look at our various businesses, the trend lineof growth that we have sustained now for several orders is continuing.

It is clear that the fixed income dislocation hurt us, and hurt us in a very significant way in those businesses. But I think I certainlyhave confidence in our strategic plan. I think that it is showing through. And I personally expect that it will continue to showthrough in the future. Those are the factors -- excuse me, I think those are the factors that people are looking at.


Well, one of your main targets for this year was to grow revenues faster than expenses; and that is not going to pan out. Thiscould be the third year in a row where that doesn't pan out. And that was clearly a very important factor.

I don't know -- and also at the corporate level the risk management, you said it was on the extreme areas of where you thoughtit should be. So how do you think about that?


Well, you ask two questions there. Obviously, we want to revenues to grow faster than expenses. It is true in many of ourbusinesses. As I said, we had a very severe dislocation in revenues in our Markets & Banking business, one that I am not sureany fair-minded person would see a way to lower expenses rapidly enough to offset that in a 5-week period.

In the rest of our business, I think we are actually making very considerable progress in that.

In terms of risk management, obviously, we wish that our risk management models had predicted what had happened here.In fairness, they included it; but only at the wide margins of what we thought was possible. I am not sure we were alone in thatdifficulty.

But the facts are the facts. We -- our job is to sustain our strategic plan is we go forward, and that is what we're going to do.







As it relates to risk management, the promotion -- or maybe it's not a promotion; I am not sure what it was. The addition toresponsibilities of the risk management head three weeks before the preannouncement?


I am not sure of your question, Mike, but it was a promotion for David. David has taken on a broader set of responsibilities.Again, I don't see risk management as a guarantor of results in the kind of market dislocations that we have had this quarter.So, I don't see that as a connection at all.


Then, last question, I mean, reasonable people can disagree. If you don't like the office of the Chairman or the way it is beingrun you just sell your stock. But my question is, I saw Robert Rubin quoted in the press saying that your job should be safe forfour years from now. Did the Board kind of reaffirm your CDO status for the next several years? Or what degree was your jobtitle reinforced?


I don't think, Mike, it would be appropriate for me to comment on what Bob said or about what the Board might be thinkingin that regard.


But you did say the Board feels comfortable with the levels of changes that have been made. So should we assume that is mostof -- the changes are done?


Well, again, Mike, I think it just wouldn't be appropriate for me to comment further on that subject.


All right, thank you.

Operator

Meredith Whitney, CIBC World Markets.

Meredith Whitney - CIBC World Markets - Analyst

Good morning. I have some operational questions, regarding Cards, mainly internationally but also domestically; and thenJapan's gray zones.






With respect to Cards domestically, you haven't seen receivable growth in some time on a year-on-year basis. You have seenpretty rapid growth specific to Latin America in international. So number one, what is your strategic effort, strategic aspirationto grow the domestic Cards, the US business? And then, what tenets do you have in place to grow that business? What are youraspirations again?

Then, what governors do you have in place to manage credit losses on the Latin American or international side given the factthat the growth is so outsized?

Then my last question related to the gray zones is, Gary, you have given -- and Chuck has given -- guidance to 2007. But canyou extend that out to 2008 in terms of what you expect in terms of the earnings impact from the gray zones laws -- change inlaws -- to be? Thanks.


Sure, thanks. That was a long list. I hope I get

q3 2007 citigroup inc. earnings conference call on oct. 15...

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